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The use of unmanned aerial vehicles in the design and construction industry is literally taking off. Here’s what owners, developers and construction professionals need to know.

Unmanned aerial vehicles (a.k.a. drones) are changing the way we do business. But, for one industry specifically, their impact has already been far-reaching, and the untapped potential is jaw-dropping. The use of drones in the design and construction industry has increased dramatically since 2014, when the Federal Aviation Administration (FAA) initially created the current regulatory structure for commercial users of unmanned aerial vehicles (i.e., section 333 exemptions and certificates of authorization). More than a third of all FAA applications list construction, real estate or utility/energy/infrastructure as the intended operation or mission for the drone.1 In fact, two of the first six FAA Section 333 exemptions were granted to Dayton, Ohio’s Woolpert, Inc., a design, geospatial and infrastructure management firm, to perform precision aerial surveying.2

Why are drones so perfectly situated for use in the design and construction industry? Drones are ideal for supporting the full life cycle of the development process—from design to construction to maintenance. First and foremost, drones can venture where humans and heavy machinery should not, providing valuable project data without risking human life. Most drones are very small, lightweight and equipped with high-quality imaging capabilities making them ideal to perform inspections in tight spaces or at high altitudes. Second, the data collection capabilities are mind-boggling. We have all seen the breath-taking aerial photos drones are capable of capturing. Couple that with thermal imaging, traditional surveying data, 3D scanning, object recognition and data cataloguing capabilities and everything from property due diligence to project design becomes available with the whirl of the propellers. Third, operating a drone is efficient and economical, resulting in numerous cost-saving benefits for a construction project. In addition to the safety aspect of utilizing drones, a drone can do most jobs a lot faster and a lot more precisely than its human counterparts. For example, drones are already being programmed to follow pre-determined flight paths and deliver daily site reports, allowing developers and contractors to better track construction progress, measure stockpiles, manage resources, reduce downtime, and help construction projects stay on schedule and under budget.3

Federal and local laws impose a number of requirements on the commercial use of drones that are beyond the scope of this article, such as holding an Airmen’s Certificate, obtaining a Section 333 Exemption, and restrictions on altitude and flight locations. But, in addition to those and other common concerns of all commercial drone users, the construction and development industry has some distinct considerations to keep in mind when conducting drone flights on project sites:

1. Project Site Owner and Occupant Notices.

You need the property owner’s permission to conduct the flight. Remember, the developer of a property is not always the property owner. If you are the contractor or a subcontractor, know the ownership of your project site and involve that entity, as well as the entity you are directly contracted with, in the plan to use a drone on the site.

Notice down the food chain is just as important as notice up the food chain. As an owner, developer, or general contractor on the job, do not assume that you do not need to notify the subcontractors and material suppliers on the site of the impending drone flight. You may not need their permission, but your Section 333 exemption will require you to notify these entities and maintain a clear distance from any unprotected individuals on the site.

Arguably, drones are fairly quiet as compared to other pieces of construction equipment. But when operated in tight spaces between buildings, the noise can reverberate. Extended flight times also pose more danger of annoying the neighbors. Notice to adjacent property owners as a courtesy is prudent and could save you time and headache. This is particularly true if the development upon which the drone flight will be conducted is in an urban environment or adjacent to a sensitive use, such as a funeral home, hospital, retirement home, daycare or other facility where disturbance or danger to the inhabitants is highly discouraged if not prohibited. Sending a notice to neighboring land owners concerning the impending use of a drone, the duration and approximate time of day the flight will take place, as well as whether this will be a one-time or repeated exercise, eliminates surprise, provides an opportunity to accommodate any special needs and may prevent a site visit from local law enforcement.

2. Site Due Diligence and Worksite Monitoring.

Just like any due diligence study performed on a property prior to purchase, the owner of the property should always be cautious about the data that others collect while determining if the site can be developed. Drone data and imagery collected to prepare site feasibility studies, wetlands analyses, or identify hazardous materials should be regarded as proprietary material just as much as an environmental study, geotechnical report or ALTA/NSPS survey. The entity collecting the data, whether directly or through a third-party consultant, should execute a non-disclosure agreement before taking flight and also destroy or transfer all drone data to the owner if foregoing the opportunity to acquire or develop the property.

If you are considering using a drone to perform construction site inspections or document construction progress, proceed with caution. Delegating your on-site inspection to a drone could leave you with hours of video and hundreds of images to review. If you do not review all imagery captured or you misinterpret the imagery, you might open yourself up to claims of professional negligence.4 This is commonly referred to as the risk of having too much information. Design and construction professionals “need to clearly outline, and usually disclaim, any responsibility to determine if the drone indicates whether or not the project is being constructed in conformance with the contract documents for the project. And, in compliance with a firm’s document retention policy, unrequested or unused information, such as the recording of a video feed, could then be discarded to avoid future attempts to place responsibility on the design firm beyond its contractual obligations.”5

Interested in monitoring workers or documenting work rule violations? At least one local union in Philadelphia has deployed drones to monitor non-union work-sites and union protests at those sites.6But beware—this is a controversial use that has more than a few labor law implications (including unauthorized surveillance of union and non-union workers, alike—an issue monitored by the National Labor Relations Board) as well as the more typical property and individual rights issues, like trespass and violation of privacy.

3. Use and Ownership of Drone Data.

Some drones can collect highly accurate topographic imagery and point clouds. But the conversion of that data into a file type that can be imported into another software platform, such as AutoCAD or a BIM platform, for design or analysis may be a tedious, multi-step conversion that could introduce user errors. What party in the collection, design, and construction process takes responsibility for those incompatibilities? Do your contracts spell out these liabilities and assign risk? If you hired a third-party consultant specifically to perform the drone functions on the project and hand over the data, do they retain some rights to use the data? After design and construction, can drone imagery be captured and used by your contractor or a subcontractor for marketing purposes? Your due diligence, design and construction contracts should clearly spell out these expectations and shift the risk appropriately.

4. Drone Insurance.

If you have not had a conversation with your insurance carrier about your use of a drone, most likely you are not covered under your existing policy. Your commercial general liability (CGL) policy probably contains an exclusion for “unmanned aircraft.” If so, you need to have a drone-specific endorsement or stand-alone drone policy to affirmatively cover your drone use. Which option is best for you and how much insurance you need should be discussed with your agent, but you should specifically inquire about the difference between “Coverage A” and “Coverage B,” which pertains to bodily injury/property damage and personal/advertising injury coverage, respectively. Development and construction professionals that subcontract for drone operation services should make sure that the firm operating the drone has appropriate coverage but you may also want to carry additional insurance over and above the third-party provided coverage.

What constitutes invoking appraisal? Does a carrier’s refusal to go to appraisal rise to the level of breach of contract?

East Richardson Baptist Church v. Philadelphia Indemnity Insurance Company,1 from the Dallas Court of Appeals, is an interesting case. The Church filed a claim and alleged $32,000 in damages. The carrier agreed to $10,400 in damages and paid it. The Church hired a public adjuster who found $36,000 in damages. Then the Church hired lawyers, who filed suit, but before filing suit the Church filed a formal demand for appraisal. The claim went to appraisal and the panel found $30,000 in damages. The carrier paid the difference between the prior payment and the appraisal award.

The Church went forward with its suit and the trial court granted summary judgment against the Church. The Church appealed asserting two theories on breach of contract. First, the Church alleged that the carrier breached the policy contract because the Church demanded appraisal during the claims handling process and the carrier refused to appraise. Second, breach of contract was proved because the appraisal award was more than what the carrier originally paid.2

To support its allegation that the Church invoked appraisal during the claims handling process, which was denied by the carrier, the Church pointed out two instances in the claim file where the Church or its public adjuster hinted at appraisal during the claims handling process. In one instance the carrier’s adjuster noted that the Church’s pastor, “said he would option for the appraisal provision in the policy.” The other instance was an email from the Church’s public insurance adjuster saying, “If we cannot reach an agreement then the insured is likely to invoke appraisal. . . .”

After citing Webster’s Dictionary on the definition of “would” the court held:

Even if e-mails from an adjuster to the insurer relaying conversations held with representatives of the insured could be considered a “written demand” by the insured, the statements in the e-mails, that Lewis “would option for the appraisal provision” and that he was “likely to invoke appraisal,” do not constitute a “demand” for appraisal of the loss…the statement that Lewis was “likely to invoke appraisal” indicated a likelihood that Lewis would invoke the appraisal process at some point in the future. However, neither statement put Philadelphia Indemnity on notice that the Church was making a present demand that the appraisal process set forth in the policy be followed for determining the amount of the loss. We conclude the Church has not presented any evidence showing it made a demand for appraisal under the policy.

A key consideration in developing a litigation strategy is whether or not insurance coverage applies to the causes of action at issue, which is important for both parties. For the plaintiff, coverage can mean that he has a greater chance of collecting on his judgment if it is going to be paid from insurance proceeds. For the insured defendant, insurance coverage can provide reassurance that, if any monetary judgment is awarded against him, he will not have to satisfy it from his own assets. Equally important, his policy will also probably stipulate that the insurer will provide him with an attorney and legal defense for any claims covered by the policy.

The rules pertaining to the dual duties of an insurer to provide insurance coverage and a defense to the insured are well-established in Florida. On the issue of indemnification for claims made against the insured, the construction of an insurance policy and the extent of coverage is a question of law for the court to decide. Jones v. Utica Mutual Insurance Co., 463 So.2d 1153 (Fla. 1985); State Farm Fire & Casualty Co. v. Lichtman, 227 So.2d 309 (Fla. 3d DCA 1969). On the other hand, it is for trier of fact to determine whether the facts of the case fall within the scope of coverage. But, the duty to defend and the duty to indemnify are not coextensive, and the duty to defend is much broader than the duty to indemnify. West American Insurance Co. v. Silverman, 378 So.2d 28 (Fla. 4th DCA 1979).

It’s common for the insurer to reach a different conclusion from the insured on the issue of whether the claims alleged against the insured implicate the policy’s duties of defense and indemnification. This determination obviously has serious implications for the insured because the denial of coverage means that he will have to him to incur the expense of hiring an attorney to defend him. However, insurers are not infallible—they make mistakes and will sometimes refuse to provide a defense even when, under the terms of the policy, they should.

For instance, in performing its due diligence and investigating the claim against the insured, the insurer may become privy to facts that are outside the allegations of the lawsuit, and its determination of coverage may be colored by those outside facts. However, with respect to the duty to defend an insured, a liability insurer’s obligation to defend the claim must be determined solely from the allegations in the complaint. State Farm Fire & Cas. Co. v. CTC Dev Corp., 720 So. 2d 1072 n. 3 (Fla. 1998). Thus, only the causes of action alleged in the complaint are valid to the determination of whether the insurer has a duty to provide a defense to the insured; extraneous facts should not factor into the analysis.

Further, the actual facts giving rise to the lawsuit are not pertinent to the determination of whether the insurer has a duty to defend; the duty arises when the lawsuit against the insured alleges facts that fairly and potentially bring the suit within the terms of the policy. Marr Invs., Inc. v. Greco, 621 So. 2d 447 (Fla. 4th DCA 1993); McCreary v. Fla. Residential Prop. & Cas. Joint Underwriting Ass’n., 758 So. 2d 692 (Fla. 4th DCA 1999). In fact, the insurer must provide a defense to the insured even if the facts alleged are untrue or the legal theories alleged are unsound because, in determining if there is a duty to defend, only the allegations of the complaint factor into the analysis, regardless of what the insured and witnesses say actually happened. State Farm Fire & Casualty Co. v. Edgecumbe, 471 So.2d 209 (Fla. 1st DCA 1985); Grissom v. Commercial Union Ins. Co., 610 So. 2d 1299 (Fla. 1st DCA 1992). The insurer’s duty to defend the insured, once invoked, continues throughout the case until the claims giving rise to coverage are eliminated from the suit. Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So. 2d 810 (Fla. 1st DCA 1985).

It is therefore advisable that, upon first learning of being sued, all defendants, whether individuals or businesses, request that their attorney review any and all insurance policies the defendant holds to determine if their insurer should provide them with a defense of the case. This is true even if they already contacted their insurer themselves, requested coverage, and were denied. Sometimes all that is required to reverse the insurer’s refusal to defend is a well-written letter from the insured’s attorney, providing a detailed analysis as to why the insurer has a duty to provide a defense.

However, the insurer will still sometimes refuse to defend the insured even after the insured’s attorney has provided the insurer with his opinion as to why the underlying lawsuit against the insured falls within the policy’s terms. In those cases, it may be wise to consider a declaratory action against the insurer.

A declaratory action is where the insured files suit against his insurer, and asks the court for a declaration as to whether the underlying lawsuit against the insured implicates the insurer’s duty to defend him[1]. A declaratory action is like any other lawsuit, except…

Recently I came across an article that led me to a case that dealt with the seemingly innocuous and often perfunctory forum selection clause. In the case (Liddell Bros. v. Impact Recovery Sys., 2016 U.S. Dist. LEXIS 36258 (D. Mass. Mar. 21, 2016)) a highway Massachusetts contractor’s lawsuit (arising out of a Massachusetts project) against a Texas vendor was governed by a Massachusetts forum selection clause forcing the Texas company to go to Massachusetts to resolve its dispute.

A forum selection clause allows parties to “agree” upon a particular locale for the resolution of disputes arising from the contract. One could see how, in this world of transnational and international business, a contracting party would prefer not to travel to a far flung destination, removed from its home base, to resolve a dispute arising out of a transaction that in essence lives close to home. So, that’s where the forum selection clause may assist. Companies can choose a convenient forum and include a related forum selection clause in their contract forms. These types of “standard” clauses are often afterthoughts in the contract drafting process. Often, the commercial and other clauses describing the business deal are the focus of negotiations and the mechanical contract clauses can be overlooked or undervalued.

The Liddell case, represents an important reminder that all contract clauses can have a significant impact on one’s business . . .

In Liddell, there was a contract dispute between a general contractor and a manufacturer of traffic control products. The Plaintiff, Liddell Brothers, Inc., a Massachusetts highway contractor, filed suit in Massachusetts Federal Court against a Texas company named Impact Recovery Systems, Inc. Before Liddell filed suit in Massachusetts, Impact filed two suits against Liddell in Texas. Impact then moved to have the Massachusetts action transferred to Texas.

In evaluating Impact’s Motion to Transfer Venue, the Massachusetts Court examined the forms. The back and forth started when Liddell sent some project plans and specifications to Impact and, in response, Impact emailed Liddell a series price quotes for certain products. The price quotes contained a section titled “quote acceptance” with a signature line. Liddell then sent Impact a purchase order.

Critically however, Liddell’s PO included product codes that were different from those in Impact’s quote and appended “terms and conditions” one of which stated that Impact’s performance would expressly confirm its acceptance of all terms in Liddell’s PO and that any additional or different terms would have no effect. Liddell’s terms and conditions contained a forum selection clause selecting Massachusetts as dispute resolution venue and space to Impact to “accept” the PO by signature.

Impact’s president signed and returned the PO, and began shipping products to Liddell. Liddell sent Impact two other POs with the same terms and conditions, which Impact also “accepted” by signature.

Impact claimed that its quote form was an offer, Liddel’s PO was an acceptance of that offer, and as such, Impact’s form governed – negating Liddell’s forum selection clause. The Massachusetts District Court disagreed.

First, the Court concluded that Liddell’s August PO was not an acceptance or confirmation of Impact’s price quote because it contained a merger clause that stated “[v]endor’s performance under this purchase order expressly confirms its assent and acceptance of all terms and conditions as set forth in this purchase order form and any additional or different terms and conditions proposed by vendor are expressly rejected and shall have no binding effect on buyer whatsoever.” The Court also noted that, Liddell’s purchase order listed different product codes and contained other different terms (e.g. indemnity and choice-of-law provisions).

Further, the Court found that Impact expressly accepted PO’s various terms by its signature. Critically, Liddell never signed Impact’s price quote. Instead, Liddell sent a counteroffer (its PO) which Impact accepted. So, Liddell’s form ruled the day, formed the basis of the contract between Liddell and Impact, and the Massachusetts forum-selection clause controlled.

The construction industry has long been a leader in the use of arbitration. An arbitration clause was first included in the AIA standard form contract in 1915. The Federal Arbitration Act (FAA) was first enacted in 1925 and the American Arbitration Association was created in 1926. Although initially hostile, courts throughout the United States and the world have come to generally favor arbitration and the enforcement of arbitration agreements. But not all arbitration clauses are equally enforceable. As arbitration provisions have become more widely used, contracting parties have continued to test the limits of enforceability. This article discusses a generally permissible practice—incorporating by reference arbitration rules granting the arbitrator the power to determine the arbitrability of a dispute—and a potentially impermissible provision—prohibiting the parties from challenging the validity of the arbitration award.

By way of background, the FAA applies broadly to all contracts that evidence a transaction involving interstate commerce. The validity of an arbitration agreement is governed generally by the FAA. For more than 50 years, federal courts treated the FAA as a procedural rule applicable only to federal cases. This limited the enforceability of construction arbitration agreements. In a 1983 decision, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), the United States Supreme Court precedent established a federal policy favoring arbitration and of resolving any doubts as to the scope of arbitrable issues in favor of arbitration. Since the Moses Cone decision the FAA is recognized to preempt state laws that would otherwise prevent enforcement of a construction arbitration agreement.

Incorporating Arbitration Provisions By Reference

Many construction contracts contain incorporated references to other party and third-party documents, such as industry form documents and arbitration rules. Incorporation by reference is universally recognized as a valid time and paper saving method of expressing the parties’ intent. Based on this general principle, many courts also recognize that arbitration agreements can be incorporated by reference. For example, the Texas Court of Appeals recently confirmed that the incorporation by reference of an unsigned document containing an arbitration clause evidences a valid agreement to arbitrate. LDF Construction, Inc. v. Texas Friends of Chabad Lubavitch, Inc., 459 S.W.3d 720 (2015). The court found that the main contract document did not need to specifically mention arbitration. The Court went on to hold that “there is no requirement that the incorporated document containing the arbitration clause must necessarily be attached to the contract for the clause to be enforceable.” It was enough that the document referred to was a standard industry AIA form “readily identifiable from the contract and available from the AIA.” This result is not surprising given the presumption in favor of arbitration and the presumption that a party signing a contract knows and accepts the terms of that contract.

Arbitration agreements sometimes explicitly state that the arbitrator will determine arbitrability, that is the arbitrator will decide whether the dispute is subject to arbitration in the first place. The Supreme Court has rules that the question of arbitrability is a question for the court—unless the parties clearly and unmistakably agree for the arbitrator to decide arbitrability. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). This then raises the question whether an agreement to arbitrate arbitrability must be explicitly stated in the agreement or whether it can be incorporated by reference.

The majority of federal appellate courts that have considered the issue have held that incorporation of the AAA Rules on Arbitration, which provide that the arbitrator has the power to rule on his own jurisdiction, is a clear and unmistakable agreement or the arbitrator to decide arbitrability. The 10th Circuit, the only appellate court to conclude otherwise, found no clear and unmistakable intent to arbitrate arbitrability because the arbitration agreement and subsequent settlement agreement were ambiguous as to whether there was even a valid arbitration clause applicable to the dispute. Riley Mfg. Co. v. Anchor Glass Container Corp., 157 F.3d 775 (1998).

A recent Florida appellate decision recognized that the majority of federal courts considering the incorporation by reference of AAA arbitration rules is sufficient evidence of the parties’ intent to have arbitrators and not a court hear and decide issues of arbitration. Glasswall, LLC v. Monadnock Const., Inc., 2016 WL 314177 (2016).

Courts Might Not Enforce A “No-Challenges” Clause

If parties can agree that the arbitrator will have the first say with respect to arbitrability of the dispute, can parties also agree that the arbitrator will have the final say? Can the parties agree in advance not to challenge the validity of the arbitration or arbitration award? A 2015 Georgia Court of Appeals decision agreed with the Ninth Circuit and said no.

In Atlanta Flooring Design Centers, Inc. v. R.G. Williams Const., Inc., the parties expressly agreed “not to challenge the validity of the arbitration or the award.” The Court found that provision to be void and unenforceable because it conflicts with and frustrates Georgia public policy as expressed in the Georgia Arbitration Code which expressly permits the court to vacate or modify an arbitration award in certain specified circumstances, including corruption, fraud, misconduct, partiality.

The Court aligned itself with cases interpreting the Federal Arbitration Act, including In re Wal-Mart Wage & Hour Employment Practices Litigation, 737 F.3d 1262 (2013). Section 10(a) of the FAA provides for a limited review of an arbitration award if it falls within four categories: corruption, fraud, partiality or misconduct causing prejudice, or if the arbitrators exceeded their powers. The Supreme Court has held that the statutory grounds for judicial review in the FAA are exclusive and may not be expanded by contract. Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008). By the same token, the Ninth Circuit reasoned, because the statutory grounds are mandatory and exclusive, they are not waivable or subject to elimination by contract.

The Ninth Circuit held that parties cannot waive or eliminate the FAA’s statutory grounds for reviewing an arbitration award. The FAA’s provisions allowing a court to review and vacate an arbitration award “demonstrate Congressional intent to provide a minimum level of due process for parties to an arbitration . . . .” Permitting parties to bypass judicial review of awards would contradict the text of the FAA, frustrate the intent of the FAA, and leave parties “without any safeguards against arbitral abuse.”

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